Commentary and musings on the complex, fascinating and peculiar world that is securities regulation

Sunday, January 05, 2014

Seven U.S. Senators urge SEC to Require Advance Form D Filings to Help State Securities Regulators

Seven U.S. Senators have written to SEC Chair Mary Jo White urging the SEC to require issuers to first submit a Form D filing when public solicitation and advertising are used. If general solicitation or advertising is not used, then the current 15 day post-first sale filing deadline would still apply. The Senators said that the advance filing of Form D will be especially helpful to state securities regulators. Currently, a Form D is not required to be filed until l5 days after a Rule 506(c) offering has commenced. In light of the lifting of the ban on general solicitation in Regulation D offerings, the Commission's proposes to require issuers to file an Advance Form D before a general solicitation offering commences. The Senators strongly urge that this requirement be adopted. Signing the letter to Chair White were Senators Carl Levin (D-MI), Martin Heinrich (D-NM), Tom Harkin (D-IA), Jack Reed (D-RI), Mark Pryor (D-AR), Jeff Merkley (D-OR) and Angus King (I-ME).

Although the Rule 506 exemption is used successfully by many legitimate issuers, they noted, the exemption has also become an attractive option for individuals who would otherwise be prohibited from engaging in the securities business, and in some cases, operates as a haven for fraud.

State securities regulators are the primary regulator of offerings conducted under Rule 506 pursuant to their antifraud authority.This front-line regulatory protection is critical, said the Senators, particularly given that the SEC does not actively monitor Rule 506 offerings and is not likely to scrutinize the tide of general solicitations or advertisements that will stem from implementation of Title II of the JOBS Act. Prior to removal of the long-standing ban on general solicitation and advertising, state securities investigators could be assured that any securities offering relying on general solicitation was registered with the SEC if it was publicly advertised on the internet or elsewhere. State securities regulators commonly encourage investors in their states to investigate before they invest.

Typically this results in communications by state regulators with investors, notably, many local "mom and pop" investors, who are seeking information about issuers and potential investments. With the removal of the general solicitation and advertising prohibition, a state investigator will not be able to determine whether the issuer is advertising an unregistered, and non-exempt, offering to the general public or engaging in a compliant Rule 506 offering.

In their view, requiring advance filing of a Form D will address the practical realities that will now be faced by state enforcement personnel. Simply requiring a Form D filing prior to any public solicitation or advertising will ensure that state securities regulators, and the SEC, will be able to determine an issuer's intent to rely on general solicitation and advertising, it will enable state regulators to respond to questions from investors in their states about publicly advertised offerings, and it will further enable local investors, who can also access Form D filings, to get basic background information about legitimate offerings before they invest.